Revaluation of Investment Properties under FRS102 UK GAAP

Revaluation of Investment Property Under FRS102 UK GAAP /Fair Value Reporting Requirements

A popular aspect of fair value accounting applicable to property investment via an SPV (special purpose vehicle) is the concept of revaluation of investment properties legally owned by a UK Ltd Company. Initial cost is recognised using acquisition cost plus any capital costs incurred to purchase the property. However, a key aspect usually missed by many accountants is the requirement to revalue the same at least on each balance sheet date (or earlier if required) for the reporting purposes.  If there are any fair value gains i.e. increase in the fair market value ascertained on the arm’s length basis, must be reported in the statutory accounts.  The gain on revaluation must be recognised as income (or fair value gain) in the income statement and a deferred tax calculation must be done to show the relevant tax expense in the financial statements (tax expense to be shown only in the accounts but no immediate real tax liability arises).  The value of the gain must not be distributed as dividends and therefore can be shown as part of equity that is not distributable.  

Eg. Initial acquisition value including the stamp duty and other capital costs is say £100,000 for an investment property to be reported in the Ltd Company’s financials.

At the end of first year (or every subsequent year-end), a revaluation exercise to be done either in-house (simply using sales data of other similar properties in the area) or using an external RICS certified valuer to arrive at the fair market value of say £110,000 as an example.  This leaves the net gain in this case of £10,000 which should be recognised as part of the income as ‘fair value gain’ or ‘revaluation gain’ in the income statement and a relevant deferred tax to be calculated and shown as an expense (DT expense as  £10,000 x 19% = £1,900) .  At every subsequent year-end a similar exercise is repeated and the values adjusted in line with the market value.  Please note that no ‘immediate’ tax liability arises on revaluation ie the Ltd Company is not required to settle the DT with the HMRC immediately.

This may have an impact on the reporting of ATED (Annual Tax on Enveloped Dwellings) especially where a gain is registered and the same revalued property value to be considered for ATED reporting.